Drug giant to pay $3.4 billion in tax case

GlaxoSmithKline settles with IRS

September 12, 2006|By McClatchy-Tribune

PHILADELPHIA -- In the biggest tax settlement in U.S. history, drug giant Glaxo- SmithKline PLC has agreed to pay $3.4 billion to the federal government in a case with tax implications for other multinational corporations.

GlaxoSmithKline, based in London with a U.S. headquarters in Philadelphia, said it was settling to avoid a far bigger potential hit from allegations it undervalued its U.S. profit on nine products - including heartburn medicine Zantac and the asthma drug Advair - between 1989 and 2005.

The large settlement was seen as a victory for the IRS in its long battle against "transfer pricing," a practice in which multinational firms ascribe revenue from intangible products such as patents and development rights to subsidiaries in low-tax countries, and allocate expenses to high-tax countries, as a way of minimizing tax.

"The IRS won. Everybody knows this is going on" among global companies, said Jennifer Blouin, an accounting professor at the Wharton School and expert on business tax strategy.

GlaxoSmithKline, the world's No. 2 drug maker as measured in sales revenue, admitted no wrongdoing in the settlement and insisted it had allocated its revenues and expenses fairly among its U.S. and British subsidiaries. It also said it has enough cash in reserve to cover the settlement.

"GSK had previously made provision for the dispute and this settlement will not have any significant impact on the company's reported earnings or tax rate," it said in a statement.

Evidently reassured, investors pushed GlaxoSmithKline shares up 17 cents, to close at $55.27 on the New York Stock Exchange. Most big pharmaceutical stocks also rose.

Multinational companies whose revenues hinge on intellectual property such as patents and licenses - particularly pharmaceutical and high-tech companies - tend to be the biggest users of transfer pricing, according to the IRS.

It estimated that companies used transfer pricing to avoid at least $2.8 billion in U.S. income taxes in 1999, with the figure rising significantly since then.

An unknown number of other multinational companies are battling the IRS over transfer pricing, experts said. Michael Knoll, a tax-law specialist at the University of Pennsylvania Law School, said, "I'm sure everybody will look at this settlement closely to try to figure out their own litigation strategy now."

Knoll added that the size of the transfer-pricing settlement "is a sign of how big the issue is."

The IRS called the GlaxoSmith- Kline settlement "the largest single payment made to the IRS to resolve a tax dispute."

The agency declined to list other big settlements, but the known deals paled in comparison. The communications company Pitney Bowes Inc. announced last month it would pay the IRS $1.1 billion for taxes related to the sale of its Capital Services division.

In June, media conglomerate Vivendi SA agreed to pay the IRS $686 million to resolve a tax dispute related to its takeover of Seagram Co.

GlaxoSmithKline said the settlement, while large, saves it from a possible tax bill as high as $15 billion if it had lost the dispute, which had been scheduled for federal trial in February.

"The important thing, from our perspective, is you just eliminate the potential exposure if we didn't prevail in a trial," said Patricia Seif, a spokeswoman in Philadelphia.

The products at issue, in addition to Zantac, Flonase and Advair, were Serevent for allergies, Zofran for nausea, Imitrex for migraines, Ventolin and Flovent for asthma, and the antibiotic Ceftin, Seif said.

The settlement centered on tax years 1989 through 2000 for Glaxo Wellcome PLC, a predecessor company that merged with SmithKline Beecham in 2000. Profits on Advair, made by GlaxoSmithKline, were at issue from 2000 to 2005.

Glaxo Wellcome had headquarters in London and North Carolina. None of the products at issue were made by SmithKline Beecham, based in Philadelphia.

As part of the settlement, Glaxo- SmithKline will drop its counter-claim against the IRS for a $1.8 billion refund of overpaid income taxes, the IRS said.

The IRS, essentially, wanted the company to allocate higher profits to its U.S. subsidiary, Glaxo- SmithKline Holdings (Americas) Inc., than it had been doing, Seif said.